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Shortage Of Fracking Crews Slows The Shale Boom

The resurgence in shale drilling and production could be bumping up against some limits, with output expected to fall far short of market expectations for this year and next, according to a new study.

Some of the constraints that shale companies will run into are on the access to oilfield services (OFS), including rigs, equipment and personnel, according to Kayrros, a French research firm backed by the former CEO of OFS giant Schlumberger, and reported on by the FT.

Over the past three years, the oil market downturn led to sharp cutbacks in drilling and spending, with OFS companies bearing the brunt of the contraction. Oil producers demanded sharply lower prices for rigs, equipment and completion services, which translated into plunging revenues for OFS companies.

But the rebound is tightening that market, with backlogs for completion services reported in places like the Permian basin. Oil producers had hoped a lot of the cost reductions and efficiencies that they achieved since 2014 would be permanent, but some of it will only be cyclical.

OFS companies have new leverage after drilling activity skyrocketed in the first half of 2017. Now, according to Kayrros, OFS companies can hike their prices, demanding higher rates for well completions, for example. But shale companies will struggle if they have to pay higher costs for services, especially if oil prices remain stuck at $50 per barrel or below.

The backlog of drilled but uncompleted wells (DUCs) has spiked this year, rising by nearly 1,000 to over 6,000 by June, a 20 percent increase since January. Part of the reason for the uptick was because shale companies are seeking to ride out the most recent downturn in prices, hoping for higher prices at a future date. But the DUC list was rising even when prices were above $50 per barrel earlier this year, pointing to other problems.

There is a growing recognition that the well backlog is largely the result of a shortage of fracking crews and completion services, particularly in the white-hot Permian basin. Producers are having to put drilled wells on the sidelines as they await the availability of a fracking crew. Prices for fracking services have doubled since last year, the FT says, according to analysts at Jefferies.

Kayrros argues that the swelling DUC list is a leading indicator of a coming slowdown in oil production. Having surged by roughly 700,000 bpd since the end of last year to more than 9.4 million barrels per day (mb/d), the shale industry is firing on all cylinders. The EIA predicts that output will top 10 mb/d by 2018.

But the industry could dramatically underperform because of these supply chain constraints. “The fracking industry is taking time to ramp up; there are not enough crews available to complete all the wells that have been drilled,” said Antoine Rostand, president of Kayrros, according to the FT.

Schlumberger’s current CEO Paal Kibsgaard told investors on an earnings call last week that Wall Street is dragging down the entire oil industry by funneling too much money into shale drilling. The WSJ estimates that roughly $57 billion has flowed into the shale sector over the past 18 months, keeping even cash-strapped drillers afloat. The surge in capital has been translated into higher and higher levels of production, forcing oil prices down.

For now, Schlumberger has benefitted from that surge in drilling. The company told investors that its revenues from the shale industry were up 68 percent in the second quarter from the first, a huge jump. Company officials also said that they are fully booked through almost the rest of the year.

But with companies the Schlumberger stretched to the limit with work, other OFS companies are likely similarly booked up, which means that some shale producers will struggle to bring new wells online. That ultimately undercuts the chances of huge production increases in the second half of 2017.

Of course, if the shortage of completion services prevents some output from coming online, and the U.S. falls short of production forecasts, that will only serve to drive up the price of crude later this year and into 2018, thus incentivizing more drilling.

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A huge number of DUC's, probably half at least, are in uneconomical plays. They were contracted when oil was thought to never go under 100 bucks, and were slowly drilled over the first year or 2 of the oil crash because it would have costed too much to cancel the deals. But, there they sit, drilled with old methods, not that long of laterals, waiting for 80+ oil to be at all worth touching again.

And now, newer ones are held hostage by the frack crew workforce who get to cherry pick their jobs and set their prices.

Jp on July 26 2017 said:

I second Kr55 comments. I work in wireline( you don't know what that is do your homework) based out in Midland, used to work in Arkansas and Oklahoma but guess what too expensive to drill and complete wells there except for some pockets. From what I've heard is that those DUC's are giving us hell completing cause there are degraded from sitting so long.... also you wanna know why there is a shortage of workers, they pay half and expect the same amount of work, until the pay and benefits get better the experience that made shale won't return and there goes your "efficiency gains" which is a total joke all the did was lay people who off and the ones who got to stay on they cut there pay and benefits.

Jr on July 26 2017 said:

Did the oil companies actually expect the OFS companies to keep selling their services at a loss once demand increased?

Dan on July 26 2017 said:

Hard to draw workers when companies are losing money on their balance sheets and everyone knows McCain said "well, some companies will have to go out of business". Short careers when the high paid government plays with your career at their wish. McDonald's might pay the bills more instead of your life constantly ripped apart by Washington.

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